Business owners can be excused for confusing business credit cards and business lines of credit. Despite the similar wording, the products have different features and are not meant for the same purpose.
Let’s explore the differences between business lines of credit and business credit cards to help you determine if your business needs one, the other or both.
What is a business line of credit?
A business line of credit (LOC) is a revolving business loan with a preset credit limit. Approval for a business LOC is based on a business’s financial picture, creditworthiness and, in some cases, collateral. LOCs are designed to cover a business’s day-to-day operating expenses and other large expenses that would exceed most credit card spending limits. Examples include purchasing equipment, raw materials and payroll.
Repayment terms, interest, and rates can vary depending on the business LOC a company uses. For example, Chase offers a business LOC for commercial needs starting at a minimum of $500,000, and the balance is due in full at the maturity date set by the bank.
Related: The best business credit cards with no personal guarantee
What is a business credit card?
Business credit cards are similar to personal consumer cards in that cardholders receive a preset credit limit and are expected to pay a minimum balance each month to maintain their account’s good standing. At TPG, however, we always recommend paying your card balances off in full whenever possible.
Both types of cards typically feature varying annual percentage rates (APRs), which is why you should always prioritize paying off balances — the longer you carry a month-to-month balance, the more interest you’ll have to pay on top of the balance you owe.
Some business cards offer rewards when you make purchases with your card. Examples include an up to $240 annual statement credit (up to $20 a month) for eligible U.S. purchases at FedEx, GrubHub and office supply stores (enrollment is required) when using the American Express® Business Gold Card, and earning 3 points per dollar spent on travel purchases (on the first $150,000 spent in combined purchases each account anniversary year) then 1 point per dollar on all other purchases when using the Ink Business Preferred® Credit Card.
Business credit cards require you to make a minimum monthly payment on any outstanding balance. Most business credit cards allow you to carry a balance month to month, subject to the current APR. However, some business cards, such as the Capital One Venture X Business, require the balance to be paid in full every month to avoid being subject to a late fee penalty.
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Business credit cards can also provide resources such as expense monitoring and employee cards to help businesses manage their finances and spending abilities.
Related: The best no-annual-fee business credit cards
How to apply for a business line of credit
The application process for a business LOC can be more extensive than applying for a business credit card. Unlike business credit cards, most business LOC applications must be done in person at a bank branch or over the phone.
When applying for a business LOC, the bank will require you to provide several items, so it’s best to have all your paperwork in order before you apply. This can include financial statements, tax returns, a list of business and personal assets, and employee information. Qualifying criteria for a business LOC can also be strict. Your business may have to be operating for a minimum number of years with an annual revenue requirement.
How to apply for a business credit card
Applying for a business credit card is fairly simple and can often be done online. You can apply for a business credit card using your social security number and an employer identification number if you have one. Your creditworthiness can often be based on your personal credit score. As long as it is in good standing, approval shouldn’t be difficult.
If you have a side gig, do freelance work or work as a contractor, you qualify as a business owner and can take advantage of business credit cards and their associated benefits.
Related: How to choose the right credit card for your business expenses
Business line of credit vs. business credit card
Here is a breakdown of how business LOCs and business credit cards compare to one another.
Because the limit on a business LOC is generally high, they are used to finance day-to-day operations or as a short- or medium-term financing tool for large purchases that will be paid off over time. For example, a construction company needing $200,000 to purchase raw materials such as concrete and steel would benefit from a business LOC.
In my experience, seeing a business credit card with such a high limit is rare. A business LOC would be an ideal solution, and the APR on a LOC is usually lower than most credit card interest rates.
On the other hand, if your business plans to spend reasonable amounts of funds on travel one month or an extra $2,000 on advertising the next month, then a business credit card is the better option.
Unlike a business LOC, business credit card purchases are typically much smaller, and payment is not due until the statement due date. This allows business owners to enjoy an interest-free grace period on their purchases before the statement closes. A business credit card will only start accruing interest if the balance is not paid in full by the due date.
You should consider the potential benefits and rewards your business misses out on if you only use a business LOC. Unlike business credit cards, most business LOCs do not offer cash back or travel rewards.
Related: The best high-limit business credit cards
Bottom line
Business lines of credit and business credit cards are two separate financial products. The former is useful for large businesses needing large capital and the latter for those with regular spending needs. It may make sense for a large business to have both, whereby the business line of credit is used for large purchases, and a business credit card is used for smaller purchase transactions.
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